Boston Fed President Eric Rosengren warned of a cryptocurrency tether last month. He described it as a possible risk to financial stability. Some investors then believe that the loss of confidence in the tether could become a cryptocurrency black swan, an unpredictable event that would have a serious impact on the market. Economists are also increasingly concerned that problems around the tether could affect markets outside the digital currency.
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Like bitcoin, tether is a cryptocurrency, but it is very different from bitcoin and most other currencies. It is the so-called stablecoin, ie a digital currency that is tied to real assets. These currencies, unlike most cryptocurrencies, maintain a stable value. Common cryptocurrencies are very unstable, for example, the value of bitcoin in April rose to a record almost 65,000 USD (1.4 million CZK), but since then it has decreased by almost half.
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Tied to the US dollar
Tether is pegged to the US dollar. While the value of other cryptocurrencies often fluctuates, the price of tether usually corresponds to one dollar. However, this is not always the case and fluctuations in the value of tether in the past have frightened investors. Cryptocurrency traders often use tether to purchase additional cryptocurrencies as an alternative to the dollar.
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Cryptocurrencies are unregulated and many banks reject digital currency transactions due to the high level of risk involved. In such cases, stablecoins tend to occur.
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However, some investors and economists fear that the tether’s issuer, Tether Limited, does not have sufficient dollar reserves to confirm its peg to the dollar. In May, the company revealed that only a fraction of its reserves, exactly 2.9 percent, are in cash, while the vast majority is in commercial paper in the form of unsecured short-term debt.
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According to the US investment bank JPMorgan, this would place the tether among the ten largest holders of commercial bonds in the world. Tether can thus be compared to traditional money market funds, but without any regulation. With tokens worth more than $ 60 billion in circulation, the tether has higher deposits than many US banks.
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There have long been concerns about the use of tether to manipulate the price of bitcoin. One study claims that tokens were used to promote bitcoin in 2017.
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The New York Attorney’s Office has agreed this year to settle with Tether and Bitfinex, an affiliated digital currency exchange. The prosecutor has accused the companies of transferring hundreds of millions of dollars to cover a loss of $ 850 million. Tether and Bitfinex agreed to pay $ 18.5 million in the settlement and were banned from operating in New York State. However, the companies did not admit any mistakes in the settlement.
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Sudden loss of confidence
JPMorgan analysts previously warned that a sudden loss of confidence in the tether could result in a severe liquidity shock for the wider cryptocurrency market. However, there are also concerns that a sudden withdrawal of tether could affect assets other than cryptocurrencies.
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In June, central banker Rosengren identified tether and other stablecoins as one of the potential serious risks to financial stability. According to him, stablecoins are becoming more and more popular and in the future a crisis could easily start if they fail to regulate them and ensure their greater stability, as they become a more important sector of the financial market.
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Bitcoins and other virtual currencies
There are many virtual currencies. One of the oldest and currently the most popular are the so-called bitcoins. They were created in 2009, but have enjoyed greater popularity in recent years. This currency was designed so that it could not be influenced by any government or central bank.
Cyber coins are “minting” a network of computers with specialized software programmed to release new coins at a steady but declining pace. The number of coins in circulation is expected to reach 21 million in the end, which is to be around 2140.
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